Homework solutions to chapter 10

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					        Chapter 10
        Question 18


Heer Enterprises needs someone to supply it with 160,000 cartons of machine
screws per year to support its manufacturing needs over the next five years,
and you have decided to bid on the contract. It will cost you $840,000 to install
the equipment necessary to start production; you'll depreciate this cost straight-
line to zero over the project's life. You estimate that in five years, this equipment
can be salvaged for $60,000. Your fixed production costs will be $290,000 per
year and your variable costs should be $8.50 per carton. You also need an initial
investment in net working capital of $75,000. If your tax rate is 35% and you
require a 12% return on your investment, what bid price should you submit?


        Input area:


        Quantity                          160,000
        Installation costs           $    840,000
        Pretax salvage value         $     60,000
        Fixed costs                  $    290,000
        Variable production cost
           per carton                $        8.50
        Net working capital          $      75,000
        Tax rate                               35%
        Required return                        12%
        *Depreciation staight-line
        over life                                5


        Output area:


        Aftertax salvage value       $ 39,000.00
        Initial cash outlay          $ (915,000.00)
        NPV w/o OCF                   ($850,313.34)
        Necessary OCF                  $235,885.20
        Net Income given OCF            $67,885.20
        Sales per year               $1,922,438.77

        Bid price                    $       12.02
160,000 cartons of machine
  over the next five years,
cost you $840,000 to install
depreciate this cost straight-
 t in five years, this equipment
n costs will be $290,000 per
arton. You also need an initial
r tax rate is 35% and you
 price should you submit?


                       93600                            1101240

                      126000
                      655200 Annual depreciation = $840,000/5 = 168,000
                       42000 Total Costs = $290,000 + ($8.50 * 160,000) = $1,650,000
                      201600
                              Annual depreciation = $655200/7 = 93600
                         7.14 Total Costs = $201600 + ($7.14 * 126,000) = $1101240
                       63000
                         0.31
                         0.15

                           7




                       28980
                      718200
                ($683,621.31)
                 $164,315.47
                  $70,715.47            OCF = NI + Depreciation or NI = OCF - Depreciation
                 1297326.184            Net Income = (Sales - Costs - Depreciation) * (1-T)
                                        Sales = NI/(1-T) + Costs + Depreciation
                10.29623955
381306600
    84548      26209.88     58338.12   120438.12    19251   241500
  1276500                     421935    -1212316            255300   79143
                                          421935
                                          421935
                                          421935
                                          421935
                                          443449
                                          22.15%
EAC=Npv/Pvifa                       PVIFA=
   235200      -257600 ($390,714.53) 3.92238013
                 -35840
                 -35840
                 -35840              ($99,611.59)
                 -35840
                 -35840
                 -35840
                 -13440
          ($133,114.53)

				
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